Commodities have been the strength behind the Australian economy for the past decade with the resources super cycle providing the wherewithal for the Rudd government to throw money at the country during the darkest days of the global financial crisis.
When resource prices did weaken some time into the crisis, the Chinese government's massive stimulus program kicked in, pushing up demand for iron ore and coal and saving Australia's economic bacon in the process.
With the GFC shrinking in the national rear vision mirror it is timely to look again at the state of the commodity markets. This week's chart, produced by Paul Ash, the Victorian president of the Australian Technical Analysts Association, shows the weekly progress of the S&P Goldman Sachs Commodity Index.
The index is made up of 24 commodities from all major commodity sectors including energy, industrial metals, agriculture-based commodities and precious metals. The diversity of the index's makeup ensures it is not overly influenced by strong movements in one commodity group.
As the chart shows, the commodity market ran white hot mid-last decade with the index peaking at 895 in July 2008. During the GFC it plummeted to 305 before China's financial fire power kicked in, helping the index to rise strongly for 26 months to April 2011. From then the market drifted lower, touching 575 in June 2012. What has happened since then calls into question the claim by many economists that the commodities boom is over.
The index has made a series of higher highs and higher lows and has created a symmetrical triangle formation within the range of 575 and 700. Such a formation is a sign of congestion in the market and usually presages a breakout. The direction of such a breakout is the key question. While commodity prices are off their 2008 speculative highs they are holding and could be reinforced if world growth picks up.
The key indicator for the direction of the index is the 30-day moving average line on the chart. Currently it seems to be moving in an undecided sideways formation.
Watch for a move either up or down to get an early indicator of any breakout. If the index rallies above the upper trend line of the triangle then a period of speculative price strength could return.
But be careful of any movement below the lower trend line.
Investors can gain exposure to this index on the Chicago Mercantile Exchange.
This column is not investment advice.
Bracing for a breakout
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